STUDY ON APPROACHES TO INCORPORATION OF MITIGATION CONTRIBUTIONS IN INTERNATIONAL MARKET MECHANISMS, INCLUDING THROUGH DEVELOPMENT STANDARDS FOR SETTING EMISSIONS REFERENCE LEVELS
International Emission Transfers after 2020 Report to the European Commission Pedro Martins Barata, Get2c Aki Kachi, adelphi March 2016 1 Contents Introduction and Problem Description ...................................................................................................... 3 Structure of the paper ............................................................................................................................... 4 1 Kyoto Protocol and the Introduction of Tradable Permits to UNFCCC .................................................. 5 Carbon markets and the Kyoto Protocol ................................................................................................... 5 The Doha Amendments – addressing the shortcomings of Kyoto ............................................................ 7 2 3 Post 2020: what will be different ........................................................................................................ 10 2.1 What does it mean to contribute and what does it mean for tradability? Issues of form .......... 10 2.2 Use of International Markets ...................................................................................................... 16 2.3 Issues of scope (coverage and gasses) ........................................................................................ 17 2.4 A look at INDCs submitted ........................................................................................................... 17 2.5 General conclusions on INDCs and carbon markets .................................................................... 21 The Paris Outcome on Markets: an assessment of the accounting provisions ................................... 22 3.1 The Outcome: an analysis of the text .......................................................................................... 22 3.1.1 Cooperative Approaches involving the use of ITMOs ......................................................... 22 3.1.2 The Mitigation and Sustainable Development Mechanism (SDM) ...................................... 28 3.1.3 Comparing Cooperative Approaches and the SDM ............................................................. 29 3.1.4 Provisions for Transparency under the Paris Agreement: an assessment .......................... 31 3.2 Open issues ................................................................................................................................. 32 3.2.1 Unpacking the issue of the relationship between crediting mechanisms and NDCs: the precedent of the E+/E-­‐ discussion ....................................................................................................... 32 3.2.2 3.3 The treatment of CDM and JI under the Paris Agreement .................................................. 34 What’s next for the building of a robust accounting regime: two approaches ........................... 35 3.3.1 Conversion to budget .......................................................................................................... 35 3.3.2 Addition and subtractions from inventory totals ................................................................ 36 3.3.3 Managing international transfers ........................................................................................ 38 4 Conclusions ......................................................................................................................................... 40 5 References ........................................................................................................................................... 43 2 Introduction and Problem Description The Paris Agreement marks a new overall framework for international action on climate change. This new framework differs from that of the Kyoto Protocol, in that participation in mitigation efforts in the regime is expected and encouraged from all Parties -­‐ developed and developing – albeit in a broader variety of forms; in Kyoto, only a subset of developed countries (Annex B) had formal mitigation commitments. The new regime differs also in regard to the lack of a formal enforcement mechanism. Countries are expected to submit and implement “nationally determined contributions” (NDCs) and the need to support developing countries in their implementation is recognized, but no country will be subject to any formal sanction for non-­‐achievement. Instead, stress is put on a facilitative compliance mechanism and on the role of a cyclical stocktaking, a peer pressure exercise in building momentum, and pressuring countries to achieve their goals and increase ambition. Mitigation effort accounting frameworks are essential for clarification and understanding of the NDCs, their reporting and understanding so as to facilitate trust and ensure the success of the future climate regime. In order to track progress accurately, despite their diversity, contributions must be clear, include reporting obligations and rules to interpret the information reported and compare them with contributions pledged. The further elaboration of the accounting framework of the Paris Agreement should lead to an output that is as simple as possible while maintaining accuracy and environmental integrity. This regime crucially relies on the transparency of Parties’ with regard to their commitments to achieve their pledged contributions, as only transparent information on countries’ contributions can lead to the mutually reinforcing confidence between Parties that the regime is built on. Transparency therefore requires both knowledge of the impact of the NDCs on emissions (ergo the emphasis on national inventories as the key tool to monitor progress) but also of flexibility mechanisms used to achieve the NDCs. Given the diversity of contribution types (reviewed in section 2.4), several problems arise, which we address in this paper: a) How can a Paris accounting framework accounting framework allow for the diversity of contributions as expressed in the intended NDCs, while both supporting and promoting ambition, rather than undermining it; b) Within that regime, how should the framework account for the additional flexibility that comes from access to mechanisms in working towards NDCs and prevent undermining the ambition in the NDCs themselves? Experience with the Kyoto Protocol shows that such mechanisms can indeed promote flexibility but also that, within certain parameters, these same mechanisms have led to fewer overall emission reductions than would otherwise have been the case, thereby blunting the overall impact of the Kyoto Protocol itself. As Section 1 will review, the Kyoto Protocol provides some clues as to the range of relevant issues to the discussion of ensuring robustness of the regime through a proper accounting regime and rules on use of mechanisms. 3 Kyoto was based on a “budget” approach with temporal flexibility, whereby all countries had commitments expressed in essentially the same way: emission reductions targets from a base year which represented set limits on allowable emissions by countries over a period, constituting a “budget” which could be drawn upon throughout that period. This budget approach was complemented with the flexibility for countries to add or subtract to that budget through a variety of actions: investing in specific forestry-­‐related actions that would generate credits internally to the country, trading on budget units to/from other countries or in international mechanisms that would earn credits on the basis of projects that would reduce emissions from a “business-­‐as-­‐usual” scenario (so-­‐called “baseline-­‐and-­‐credit” units). No such uniform commitment type exists in the Paris Agreement. Although several countries have expressed NDCs that could easily be converted into a “budget” similar to Kyoto, pledges include different kinds of mitigation targets not expressed in any mitigation metric: policies and measures, i.e. undertakings to achieve certain policy targets, etc. The transparency framework relies on new and expanded reporting requirements and “corresponding adjustments in Parties for both anthropogenic emissions by sources and removals by sinks covered by their nationally determined contributions”, as expressed in paragraph 37 of Decision 1/CP.21. This is in a sense uncharted territory. Given that a corresponding adjustment must be made, it is not clear WHAT is being adjusted, only what to adjust it FOR. The wording therefore could imply an accounting record to complement the inventory of “anthropogenic emissions by sources and removals by sinks” accounting framework, but critically could theoretically imply other reference points other than national or sectoral inventory totals. The Paris Agreement does however advance the notion of common rules on transparency and including in relation to accounting for NDCs. This paper explores the key issues in relation to the rule-­‐set to be put in place through the upcoming negotiations in order to foster understanding of how the various components fit into the overall framework. Structure of the paper This paper starts with the accounting precedent the Kyoto Protocol provided the UNFCCC negotiations and its role in developing carbon markets. We then provide an analysis of the various kinds of intended nationally determined contributions submitted and their implications in terms of accountability and tradability of outcomes, taking complications posed by other parallel mechanisms into consideration. We further examine domestic carbon market developments for an indication of what repercussions these may have for accounting under the Paris Agreement. Provisions in the Paris Agreement are then discussed, exploring their basis and the issues that these provisions raise. Finally, we then develop recommendations for an accounting framework to support the Paris Agreement. 4 1 Kyoto Protocol and the Introduction of Tradable Permits to UNFCCC Accounting under the Kyoto Protocol was relatively simple, comprehensive and central to the regime in that commitments (only for developed countries) were all based on a single target type with a centrally tracked metric. Annex 1 countries made a commitment to reduce a quantified amount of six specific greenhouse gasses measured by a given methodology with regard to their global warming potential from their whole economy based on a uniform metric over a fixed period expressed as Quantified Emission Limitation and Reduction Objective (QELROs) in tonnes of CO2 equivalent. An element of flexibility to increase efficiency in reducing emissions was added through the mechanisms of International Emissions Trading (IET), Joint Implementation (JI) and the Clean Development Mechanism (CDM). The regime was built on a dual view of the world: developed countries had emission reduction targets (listed in Annex B of the Kyoto Protocol), developing countries made no reduction commitments. The sum of the Annex 1 reduction targets formed a collective reduction budget amounting to an average reduction of about five percent of greenhouse gas emissions generally from the 1990 level over the course of the first commitment period 2008-­‐2012, determined ex ante. Note that no discussion took place on either baseline emissions or level and additionality of effort, or indeed adequacy in relation to the magnitude of the challenge. IET under Article 17 of the Protocol allowed industrialized countries to trade budget, i.e. Assigned Amount, Units (AAUs) among themselves to reach their reduction obligations. Within and tied to this budget, JI gave industrialized countries a way to also seek out and invest in specific mitigation opportunities in other industrialised countries, and be credited Emission Reduction Units (ERUs) to use towards their targets. The CDM enabled industrialised countries to invest in mitigation measures in developing countries that did not have a reduction obligation and be credited with Certified Emission Reductions (CERs), which could also be used towards fulfilment of their reduction commitment. While developing (non-­‐Annex 1) countries did not have an obligation to reduce emissions, the CDM was designed to issue CERs when a reduction from a “notional budget” of what was assumed to be Business as Usual emissions. This reduction was judged primarily on a project-­‐by-­‐project basis according to assessments of additionality from a baseline, and only issued ex post rather than ex ante. In Paris terminology therefore, Kyoto was based on a single sort of NDC with a single metric – a quantified multiannual reduction or limit on emissions for a common period formulated against a base year, with provision for quantification and conversion of NDC to a budget for all with targets, and with trading in units of that budget. Though the Kyoto framework and its instruments have been subject to critique ranging from “hot air”, to problems of additionality, to perverse incentives and others, these were not accounting issues per se. They however do prove instructive to the design of future mechanisms to facilitate the robust design of new flexibility mechanisms in the changed context of the Paris Agreement. Carbon markets and the Kyoto Protocol Carbon markets rely on the creation of an asset that is related to a common metric (usually a ton of greenhouse gases), either in terms of limited rights to emit (in the case of allowances) or emission 5 reductions (in the case of offsets). Under the Kyoto Protocol, quantified emission commitments (QELROs) and their fulfilment through the reconciliation between assigned amounts, i.e. those emission limits and the holdings in registries of AAUs, ERUs, and CERs, tradeable units, greatly facilitated the translation into the original domestic carbon markets of the EU or NZ, by allowing countries to ‘back up’ each unit of their domestic system (an EUA or an NZU) with the corresponding unit of the international system. Units were internationally recognized, ensuring fungibility and tradability. (see figure below) The use of CERs, subject to some conditions, in each of the markets, allowed fora limited linking function between the EU Emissions Trading System and the New Zealand Emissions Trading Scheme, and the obligations of other countries under the Kyoto Protocol, notably Japan. Together, the overarching architecture of obligations translated into allowances and reductions provided an accounting architecture that provided a framework to track of compliance with countries’ commitments under the Kyoto Protocol. This facilitative role linking domestic mitigation efforts with the multilateral effort had its drawbacks in different ways relating to IET, CDM, and JI. In the case of IET, AAU’s were massively oversupplied because many countries’ business as usual emissions were far less than what were budgeted resulting in “hot air” (the informal expression to denote the excess AAUs mostly Eastern Europe and the former USSR)1 and there was a serious lack of demand in part because the United States did not ratify the Protocol and thus did not participate. This link was further called into question when this oversupply found its way into the European Union Emission Trading System (EU ETS), through its conversion into ERUs. The effectiveness of the Kyoto architecture was further strained by the critique of some stakeholders who questioned the credibility of the CDM, especially with regard to methodological issues related to baselines and the impact of CDM itself on the developments of policies in host countries. The CDM was seen by all sides as a “pure offset” mechanism, under which all emission reductions were to be credited towards Annex 1 budget targets (allowing them to emit more). This meant that if the baselines of CDM projects were not credibly set, this the integrity of Annex I targets would then be compromised. The CDM architecture had an in-­‐built incentive for all parties involved in each CDM project to exaggerate the project’s reduction impact from business-­‐as-­‐usual emissions: host countries had an interest to maximize revenues (and had not commitments that could thereby be compromised); project developers, also to maximize revenues; buying entities to find cheaper compliance options; and ultimately Annex I countries to cheaply comply with their targets. The system needed a strong regulatory role at its centre consisting of an independent Executive Board, strong and independent validators and verifiers. Beyond this design issue, the fact that developing countries saw themselves as mere suppliers of credits meant not only that they had an incentive to maximize credit issuance, but they also had a disincentive to ever set their own targets against which traded credits would have to be subtracted as was the case under JI. CDM therefore at least notionally provided a disincentive for developing countries to contribute global mitigation themselves. This started to change, notably in Copenhagen, where a number of non-­‐
1
Eventually addressed through the inclusion of Article 3.7 ter in the Doha Amendment 6 Annex 1 countries pledged reductions and much more prevalent in the NDCs of the Paris Agreement. As emerging economies develop their own mitigation policies and set their own domestic market mechanisms, these countries increasingly recognise the opportunity cost of trading these reductions. It is to be expected that the overall balance of incentives will now be more akin to that of what was to be expected from Joint Implementation (at least for countries with overall mitigation goals). A further disincentive to developing countries stemmed from the long-­‐term nature of most CDM projects with crediting lifetimes of up to 21 years, effectively further putting into question when and how developing countries -­‐ and especially emerging economies -­‐ would ever take on binding targets under the Kyoto Protocol. JI also had its limits. Under the JI system, it was expected that host countries meet a number of pre-­‐
requisites related to the establishment of a national inventory system. The annual compilation of a national inventory would be deemed “safe enough” for credits to be generated under their own national system. Ideally, accounting-­‐wise, JI would simply be a form of ex-­‐post emission trading, as the number of tonnes reduced (ERUs) by each project would be subtracted from the host country’s budget (AAUs), as if these tonnes had been sold as budget units. The idea was, if incentives were correctly placed, countries would consider engaging in JI only insofar as the transfer of units out of their national budget would not impact their compliance with their own targets under the Kyoto Protocol. This ideal situation was however far from the reality of the Kyoto Protocol, as the “hot air” AAUs were far more abundant than the emissions that the country would otherwise have emitted and did not actually represent a reduction from BAU. Although AAUs were relatively restricted in use (only to be bought by developed countries’ governments), ERUs units were granted access to the EU ETS. The final years of the Kyoto period therefore saw a rush to convert budget units into JI units to ensure their use under the EU ETS. These units were in many cases of questionable environmental integrity as they amounted to reductions of an inflated Kyoto budget for some countries. In the end, the accounting framework of Kyoto was not necessarily flawed. For the most part, rules put in place ensured the proper functioning and accounting for the target system. Instead, the set of targets put in place in some developed countries did not represent actual reductions from what would have otherwise taken place and the lack of incentives on the part of developing countries and CDM participants to conservatively estimate their emission reductions led to further inflation of the budget. The Doha Amendments – addressing the shortcomings of Kyoto In Doha, the work on “repairing” the budget approach of Kyoto was concluded with the adoption of the Doha Amendments to the Kyoto Protocol. In relation to markets, the two main issues, as outlined above were a) the criticism of the CDM in relation to its governance system and the lack of contribution to mitigation it involved, and b) the issue of how to deal with the potential banking of surplus units (“hot air”) in the system, as under the existing KP rules, no effective restriction on banking of the surplus would have been applied, which had become unacceptable for a number of Parties. A compromise had to be found regarding: a) thresholds of units that can be banked, and/or b) limits on trade of units that have been banked, and/or 7 c) limits on the use for compliance of banked units. The result, the Doha Amendment was a combination of a), b) and c). It effectively cancelled part of the banked surplus by requiring that “any positive difference between the assigned amount for the second commitment period and average annual emissions for the first three years of the preceding commitment period multiplied by eight shall be transferred to the cancellation account of that Party” (article 3.7 ter) and hence no longer available for compliance. Beyond banking, the Doha amendment to the Kyoto Protocol included additional restrictions in relation to the use and trade of banked units from CP1 to meet CP2 targets: •
A country with a reduction target will have its banked CP1 AAU units transferred to a previous period surplus reserve (PPSR), and those units will only be used for compliance (i.e., cannot be traded further). The surplus in the PPSR can be used for a country’s own compliance with its CP2 target during the true-­‐up period (the additional period for fulfilling commitments) of CP2. There is no limit on how much of its CP1 AAU surplus a country can use to comply with CP2. However a country cannot sell CP2 units to another country and then meet their own target with CP1 units. •
A country with a commitment in CP2 can buy CP1 AAUs from another country that has a commitment in CP2, up to a limit. The limit is set at 2% of the assigned amount for CP1 of the purchasing Party. Buying is, therefore, limited, but selling is not. As an important note, several of the Parties that intend to ratify the Doha Amendment, notably European countries, signalled from the outset in Doha their intention not to use or trade the potential surplus from the first commitment period. The interest of the discussion on the Doha amendment in relation to the accounting framework of the Kyoto Protocol is its relevance in relation to the new accounting framework required for the implementation of the Paris Agreement. Given the diverse nature of contributions and the cyclical nature of contributions under the Paris Agreement, the Doha amendment denotes a couple of important benchmarks: a) the ability to adjust/manage, in the presence of longer-­‐term targets that may include “hot air”, overall levels of tradable units to provide effectiveness to the regime; b) the need for the accounting regime to include provisions for such an adjustment, whether at a central level or, failing that, through particular restrictions by countries or groups of countries. Article 3.7 ter provides a precedent in which a reference level (i.e. average emissions for the three first years of the preceding commitment period) was negotiated to define a manageable level of bankable units into the second system. This level bears no relation to the “budget” itself but rather to inventory numbers. Eventually, the Kyoto system was further diminished through attrition: while the Kyoto Protocol’s first commitment period from 2008 -­‐2012 included obligations for a large number of developed countries, but the United States, the world’s largest emitter at the time, declined to ratify and did not participate. Canada, another country with obligations, withdrew from the Kyoto Protocol before the end of the first 8 commitment period. Several countries including Japan, Russia, and New Zealand then declined to participate in the second commitment period. Whether cause or effect, the Kyoto framework, its budget approach, and the institutional body of the CMP diverged from the negotiating direction of the rest of the COP itself, leading many countries to look for an alternative approach for the new globally binding regime after Kyoto. 9 2 Post 2020: what will be different A number of factors make accounting under the new regime of the Paris Agreement very different and more complicated than the Kyoto Protocol: notably that all Parties will contribute, that these contributions do not all take the same form, and Parties wrote new, different provisions for flexibility into the agreement. In the negotiations on the Durban Platform for Enhanced Action (ADP), which cumulated in the Paris Agreement, Parties agreed to work towards an agreement “applicable to all Parties” to serve as the basis for international progress on addressing climate change. In other words, all Parties are expected to contribute based on the principle of their Common but Differentiated Responsibilities and Respective Capabilities (CBDRRC). As noted, the fact that all Parties are expected to contribute is in contrast to the static framework of the Kyoto Protocol, under which only industrialized countries and economies in transition in Annex B (most UNFCCC Annex 1 parties) had obligations. This is especially important in that with all countries contributing, the Paris Agreement greatly expands reduction commitments beyond those of the Kyoto Protocol, which did not mandate mitigation action from the two largest emitters -­‐ the USA and China. Importantly, a set of common rules is to be applied throughout in relation to accounting for contributions. Differentiation in the type and framing of the contribution can therefore be expected (and to a degree, is welcomed by the regime, accommodating different national circumstances), but should not lead to a different set of rules in relation to reporting and accounting for contributions, which with trading could seriously undermine the effectiveness, transparency of effort and stocktaking aspects of the Paris Agreement. However with the expansion of coverage of these contributions, comes an increased diversity in the type, level and depth of contribution. In Lima, Parties were unable to reach consensus on the format and information to be submitted for Parties’ INDC. This was reflected in the actual INDCs submitted. Given this lack of guidance, it was clear that their diversity was going to make their framing, quantifiability and comparability complicated. Adding to this complication, the Paris Agreement recognizes in Article 6.1 that some Parties choose to cooperate voluntarily in implementing their NDCs, which may include approaches involving “the use of internationally transferred mitigation outcomes” as described by Article 6.2 and further establishes a (new) mechanism to contribute to the mitigation of greenhouse gas emissions and support sustainable development under Article 6.4. Both Article 6.2 and 6.1 imply transferrable emission unit outcomes which must be taken into consideration when tracking Parties’ achievement of their diverse goals. 2.1 What does it mean to contribute and what does it mean for tradability? Issues of form As discussed, as there was no prescriptive form for INDCs (a development foreshadowed by the pledges made in Copenhagen and Cancun) it was clear that a variety of kinds of contributions were forthcoming: In some cases, Parties have even stated multiple different kinds of targets in one INDC. Contributions are not consistent in terms of base year or target year, if they are a single year target or over a given period, 10 what gases they cover, or what actions or policies are to be pursued. This variety of mitigation contributions from a more diverse group of UNFCCC Parties than the Kyoto Protocol poses challenges for accounting in general with regard to progress towards the common goal and specifically for the design of a robust trading mechanism to help maximize efficiency. A typology of contributions can be categorized as follows: Table 1: Variety of INDC Contributions Quantified/ Expressed in GHG? Non-­‐
Quantified Quantified GHG Contribution type 2
Typical formulation Countries using this kind of target Convertibility into unit-­‐based system Base Year Reducing GHG emissions from base-­‐year emissions Annex 1 Countries, Barbados, Bosnia and Herzegovina, Botswana, Brazil, several SIDS, Dominican Republic, Equatorial Guinea, Guinea, Kazakhstan, Tajikistan Yes Baseline scenario Reducing GHG from BaU by X% in XYZ Yes, but issues Intensity goal Decreasing GHG intensity of GDP by X% Afghanistan, Albania, Algeria, Andorra, Angola, Antigua and Barbuda, Argentina, Bangladesh, Barbados, Bosnia and Herzegovina, Burkina Faso, Burundi, Cambodia, Cameroon, Central African Republic, Chad, Colombia, Comoros, Democratic Republic of the Congo, Djibouti, Ecuador, Eritrea, Fiji, Gabon, Ghana, Guatemala, Haiti, Honduras, Indonesia, Iran, Iraq, Ivory Coast, Jamaica, Jordan, Kenya, Kiribati, Kyrgyzstan, Lebanon, Lesotho, Liberia, Macedonia, Maldives, Mali, Mauritania, Mauritius, Mexico, Morocco, Namibia, Niger, Nigeria, Paraguay, Philippines, Republic of Congo, Rwanda, Saint Kitts and Nevis, Saint Lucia, Sao Tome and Principe, Senegal, Seychelles, Solomon Islands, South Korea, Sri Lanka, St Vincent & the Grenadines, Thailand, Togo, Trinidad and Tobago, Tanzania, Venezuela, Vietnam, Yemen, Zambia, Zimbabwe Chile, China, India, Malaysia, Singapore, Tunisia, Turkey, Turkmenistan, Uruguay Yes, but conditions with Per capita goal Decreasing or stabilisation GHG output per capita Israel, Costa Rica Yes, but conditions with Fixed level Certain number of net tonnes in a given year or carbon neutrality Armenia, Bhutan, Costa Rica, Ethiopia, Oman, South Africa, Uruguay Yes (with caveats) liability 2
These lists are non-­‐exhaustive and some countries are listed twice in some cases when they have submitted multiple targets. 11 Non-­‐
quantified Trajectory/ Peaking Year China, Pakistan, Singapore, South Africa Other non-­‐
GHG metrics Energy intensity Outcome-­‐
based Policies actions Cape Verde, Chile, China, Guyana, India, Lebanon, Nauru, Nepal, Niue, Papua New Guinea, Samoa, Somalia, Tonga, United Arab Emirates, Vanuatu Difficult Bahrain, Belize, Benin, Bolivia, Cuba, Egypt, El Salvador, Gambia, Guinea Bissau, Guyana, Indonesia, Jordan, Kuwait, Laos, Malawi, Mongolia, Mozambique, Myanmar, Papua Qatar, Saudi Arabia, Sierra Leone, Somalia, South Sudan, Surinam, Swaziland, Uganda, United Arab Emirates Difficult and Given number of GW renewable energy Process-­‐
based Policies Actions and Feed-­‐in tariffs; Carbon taxes Each kind of commitment has different implications for quantifiability and comparability and therefore accounting if Parties want to transfer or trade units. In each case there may be other information or assumptions required to foster transparency and accuracy in terms of actual mitigation outcomes and therefore for any attempt to robustly transfer or trade any of those outcomes. The kind of commitment offered, in many cases reflects not only a perception of ambition, but also perceived capacity and understandings of responsibility with regard to development level and historical emissions. Base year targets A legacy of the Kyoto Protocol is that Annex 1 countries were generally expected to, and have generally followed through with the definition of their contribution in terms of a reduction from a historical base year. In several cases however it is unclear if the stated NDC represents emissions in a single year (which we would categorize as a fixed level goal3) expressed as a reduction from a base year, or if the target refers to the total emissions over the period between the base year and the target year (QELROs) as was the case under the Kyoto Protocol. The agreement itself makes no reference to a budget or QELROs. A clarification of these targets in terms of a budget would be necessary to facilitate accounting for a trading mechanism between budgets as was the case under EIT and JI. It is worth noting that the actual inventoried emissions in a given target year can vastly differ from the expressed target in a target year with a QELRO budget: as a budget, a QELRO could facilitate banking from early action (or unintentional hot air) and allow for the actual overshooting of the inventoried emissions in the target year; or conversely for the initial rapid expansion of emissions as long as this is later made up for by reductions (borrowing) leading to a much lower inventory number than would be expected in the target year. QELRO inventory emissions world correspond to a given reduction in a given target year under a straight trajectory with no banking or borrowing between inventory years (a highly unlikely scenario). 3
We discuss single year targets under “fixed level goals”. 12 According to WRI, 33 countries (counting the EU 28 as 1) have base year targets, these are mostly Annex 1 countries, some small island developing states, Azerbaijan, Brazil, Botswana, the Dominican Republic, Equatorial Guinea, Guinea, Kazakhstan, and Tajikistan. Because most major emitters including the US4, the EU, Russia, Japan, Brazil, Canada and Australia have all expressed their targets in terms of a base year, this kind of target accounts for almost 40% of global emissions. Baseline scenario contributions Contributions defined as “achieving emission reductions from the projected emissions by year x (either 2025 or 2030), which can be labelled as baseline scenario contributions, represent a large number of contributions. Some countries provide an estimate of what their business as usual scenario emissions are projected to be in the target year. But regardless of whether this estimation is provided, in most cases, it is left unclear if the scenario (and therefore the target) is actually fixed ex ante, or if the country intends to update what it may have thought to be the BAU case. The popularity of this particular type of contribution may come from the misguided notion that a contribution specified in relative terms (i.e. as a deviation from a “growth baseline”) allows countries more flexibility in meeting their development imperatives – in contrast to absolute targets. It is important at the outset to dispel this misconception: advancing a target as a relative target only provides flexibility if that the baseline scenario may be changed due to unforeseen conditions, so that the baseline and therefore the target change time as the target date approaches. A plurality, 76 of 161 Parties expressed their INDC as a reduction from a baseline scenario. These include significant emitters such as Indonesia, Mexico, Iran, South Korea, Turkey, Thailand, Argentina, but because most countries that have selected these targets are not major emitters, they add up to approximately 14% of global emissions. “Ex ante” fixed baseline scenario contributions If however, the baseline scenario is fixed ex ante, then a baseline scenario, expressed as “deviation from projected emissions” (often “Business as Usual”) can easily be translated into an absolute emission budget. This translation does not impact the ambition expressed in the target (indeed an absolute target can equally lack ambition as seen under the Kyoto Protocol). Fixing the baseline scenario ex ante negates the purported perceived flexibility of a relative approach. The reliance on “deviation from baseline” can however impact the ability to trade using the traditional budget approach in at least two ways: -­‐
First and foremost, if the baseline is meant to be updated or dynamically adjusted in any way, the generation of any unit (either an allowance or a credit) from within the scope of that contribution will have to either a) await the final calculation/adjustment of the baseline; or b) be 4
Actually expressed as a range of “26-­‐28 per cent below its 2005 level in 2025 and to make best efforts to reduce its emissions by 28%”. 13 -­‐
subject to liability provisions that ensure that any generation of units in excess of the final calculation will be “made whole” by some mechanism, usually cancellation of equivalent amounts of units in the system); Secondly, the exercise of putting forward a “deviation from baseline” draws attention to the package of policies included in the baseline scenario and the level of ambition/realism in the baseline, by making more explicit what is to be included and excluded. (GHG) intensity goals Given the need to decarbonise as the main imperative of advanced economies, GHG intensity goals are also attractive, in particular for countries that intend to move away from carbon-­‐intensive structures towards more service-­‐based, lower carbon industrial structures of their economies. GHG intensity goals also provide extra flexibility, as they allow countries to implement measures both in their energy mix and in their industrial structure: 𝐺𝐻𝐺
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A country can therefore choose any number of combinations, from acting decisively on lowering the energy intensity of its industry (energy efficiency) or in lowering the carbon intensity of it energy mix (increasing share of renewables, moving from coal to gas to renewables). It’s no wonder therefore that large industrialised economies have in the past used this contribution type (including China in its Cancun/Copenhagen 2020 contribution). As with baseline scenario goals (without an ex ante definition of the baseline), contributions stated as a decrease of X% of GHG intensity by a certain date pose difficult issues for the generation of units. In particular, compliance with such a target presupposes calculation of GDP numbers. Most GDP statistics are subject to various revision exercises prior to reaching a “final status” and even then, months after the fact. Therefore, generating units from overachievement of a particular target could only be done ex post, severely restricting trading in the interim. Once again, trading could indeed happen ex post, i.e. upon verification of the validity of units by recourse to the reviewed national inventories (or other NDC-­‐
related MRV instruments), or ex ante, with an accounting system akin to the Kyoto approach, but most likely under a system of “caveat emptor” or buyer liability with the risk of the baseline later being redefined and therefore undermining the credits transferred. In order to mitigate that risk, and similar to existing systems where such problems persist – taking a leaf from the Kyoto accounting for non-­‐
permanence in forestry projects, one could envisage a range of instruments, such as temporary units or different liability schemes. Comparatively few countries have selected emissions intensity targets, but because China and India (the largest and fourth largest emitters respectively) both have submitted intensity targets (among other targets), intensity targets cover almost a third of global emissions. GHG per capita goal 14 The analysis of emissions per person in the population is similar in most respects to the GHG intensity goal with however a much lower level of variation and therefore lower levels of risk attached to over-­‐ or under-­‐estimation of population levels. Major examples of countries that submitted per capita targets include Israel and Costa Rica, but these countries are comparatively not large emitters and likely represent less than 1% of global emissions. Fixed level goal Fixed level goals, are an expression of a certain number of net tonnes of emissions in a given year, which may be zero (carbon neutral). Such a goal does not express a budget over a given time period, and has no bearing on the total number of tonnes of emissions emitted over a given period, and therefore makes trading between inventory years complicated if not impossible. Armenia, Bhutan and Costa Rica have carbon neutral goals, while Ethiopia and Oman provide a fixed number of tonnes they expect to emit in 2030. Collectively these goals account for less than 1% of global emissions. Although not specified in many cases, it is assumed that the base year reduction targets represent QELRO like budgets rather than fixed level goals. Energy intensity goals Unlike GHG intensity goals, energy intensity goals do not express themselves into a carbon equivalent outcome. It is therefore difficult to translate such goals univocally into a carbon asset that is compatible with existing carbon markets. It is possible to translate energy intensity into a GHG goal only if one makes an assumption with regard to the relationship between GHG and energy, but such an assumption would either take a fixed relationship between the two, or necessitate a scenario relationship in the future, in which case a GHG intensity goal could just as well be used. This type of target was not prominent among the INDCs submitted. Trajectory / Peaking Targets Several countries, notably China, Pakistan, Singapore, and South Africa have submitted peaking trajectory targets. Although such a target directly relates to GHG emissions, the number of tonnes is not quantified and gives no indication of the actual emissions either in the peak year or in the years before or after. Together, these countries account for just over 26% of global emissions, but excluding China, which is the world’s single largest emitter, the percentage drops to under 2%. Policies and actions (processes or outcomes) 35 countries have their main targets expressed in terms of policies and actions and without any mention of greenhouse gasses. These are often deemed to be less restrictive and more in line in particular with the capacities of least developed countries5. These contribution types reflect the current emphasis in many countries on development of climate policy frameworks and reporting frameworks, in their early 5
Other countries may have a policy or action target in addition to a different kind of target 15 stages of the development. It would seem therefore more appropriate therefore for countries with lower capacities in terms of either policy modelling and forecasting to start the climate policy development with the development of low carbon development strategies, which can then be translated into firm contributions. Countries can then commit either to: -­‐
-­‐
Achieving a particular (non-­‐GHG) outcome by a certain date. This outcome can be stated in any metric that is pertinent to the specific action (e.g. in renewable energy: kWh of installed capacity). This is for example a contribution included in India’s INDC. Achieving procedural milestones: enacting a particular policy framework on renewable energy or energy efficiency development (e.g. adopting an advanced country energy performance standard by a certain date, training personnel on key low carbon emission technologies As the majority of countries with policy and action INDC targets are least developed countries they account for, even cumulatively, for a negligible share of global emissions. However, several countries with policy and action GHG targets are significant emitters, these include members of the Arab League such as Saudi Arabia, Egypt, United Arab Emirates, and Kuwait, which cumulatively account for almost 3% of global emissions. Obviously in this case, given the non-­‐GHG metric involved, these actions cannot be easily translated into the generation of a carbon or allowance. In particular, process-­‐oriented goals will make it very difficult to allow carbon crediting from a budget, as any action envisaged therein may result in a range of GHG outcomes, depending on assumptions in terms of the policy baseline. In other words, process-­‐oriented goals, in order to be made compatible with carbon crediting require firming up of baseline scenarios in relation to the outcome of the policy process committed to, and conversion of such baseline scenarios into GHG CO2 metrics. 2.2 Use of International Markets As diverse as the targets are, accounting for their achievement in isolation is generally fairly straightforward, even if this cannot always be expressed in terms of tonnes of GHG emissions. An element of complication is added in accounting for achievement of goals for countries that intend to use international markets to achieve a portion of their NDC. According to WRI (WRI 2016), 11.2% of INDCs do not intend to use international markets for their INDC achievement. These Parties include the US, the EU, and Russia; together, these countries account for almost a third of global emissions. 35.4% of submitted INDCs do not specify any possible use of international markets. These countries include Australia, China, India, and Saudi Arabia. Just over half, 53.4% of countries say they will or might use international markets to achieve their NDC’s. The vast majority of these are likely prospective sellers of credits. Of the Annex 1 countries, the only major likely potential buyers are Canada, Japan, New Zealand, Norway and Switzerland, which cumulatively make up for less than 5% of global emissions. In various other cases where countries have indicated that they intend or may use international markets, it is unclear if the country intends to be a 16 buyer or seller. Equally unclear in most of these cases is how (or even if) the country has considered that to avoid double counting, or that potentially sold credits would needed to be accounted for in terms of their own contribution (depending on its scope). 2.3 Issues of scope (coverage and gasses) INDCs also raise issues of compatibility with generation of carbon assets, in relation to the scope of emissions they are meant to cover. In this regard we can distinguish between economy-­‐wide goals and sector goals. Economy-­‐wide goals imply that all emissions covered by the national inventory are included in the scope of the INDC. In such cases, in which a budget system is used over a specified time period, there is effectively no potential for double counting: any addition anywhere in the system would result in a subtraction/reductions elsewhere. This is consistent with the Kyoto approach. Although the targets of the various INDCs are in themselves of various natures, when examining the sectoral coverage and scope, it further becomes clear that the sectors considered are not all economy wide and thus do not cover all potential emissions in the country. Most INDCs cover the major Kyoto gasses (carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), hydrofluorocarbons (HFCs), perfluorocarbons (PFCs), sulphur hexafluoride (SF6), and nitrogen trifluoride (NF3)); but several INDCs only specify CO2; and some do not specify the gasses covered or considered. Mexico’s INDC also considers short-­‐lived climate pollutants such as black carbon and tropospheric ozone. Such diversity also poses challenges to accounting for market flexibility under the Paris Agreement. 2.4 A look at INDCs submitted Given the various types of INDC’s submitted, it is worth taking a closer examination of the individual INDC’s of the major Parties that make up the majority of global emissions as well as a representative INDC, each of which may serve as important case studies for further exercises on how to account for international transfers. As these contributions are nationally determined, each country has customized the contribution to itself including with respect to how they intend to engage or not engage with international markets. These contributions also represent the spectrum of contribution types from base year, to intensity, to policies and actions, as well as a reduction from BAU baseline (in the case of Ethiopia then equated with a fixed year target). Based on the various INDCs, we then give an assessment to what extent a Kyoto approach to accounting could work towards tracking INDC achievement. China China’s is the world’s largest single emitting country with almost a quarter of global emissions in 2012, so what it decides to do on a national level has a huge effect on global emissions. China is further important as it was by far the largest single source for CERs and carries important weight in international climate negotiations. A number of contributions of various different kinds are outlined in China’s INDC including a peaking target, an intensity target, and two action targets namely: 17 •
•
•
•
To achieve the peaking of carbon dioxide emissions around 2030 and making best efforts to peak earlier; To lower carbon dioxide emissions per unit of GDP by 60% to 65% from the 2005 level; To increase the share of non-­‐fossil fuels in primary energy consumption to around 20%; and To increase the forest stock volume by around 4.5 billion cubic meters on the 2005 level. China does not mention international markets in its INDC and has further repeatedly questioned the rationale behind developing a mechanism without a clear indication of sufficient ambition to create demand for credits. 6 At ADP 2-­‐8, China specifically said that it did not see the need to include a market mechanism in the 2015 agreement and that further work on markets should wait until the commitments of developed countries were clear and the work of subsidiary bodies had finished. 7 Given that international transfers were not mentioned and China’s UNFCCC negotiating positions regarding market mechanisms, it unlikely that China will engage in any international transfers for INDC in either the short or medium term. However if international transfers were to be a consideration for China, the application of a Kyoto accounting approach would encounter a number of challenges namely that, several of the contributions are actions and policies and not quantifiable in budget terms, and the intensity target would require a better assessment of the Chinese GDP ex ante. A non-­‐budget accounting approach based on inventory additions and subtractions instead (as stipulated in the Paris outcome) would nevertheless still require an assessment of the relationship of these purchases/sales to the INDC itself. The lack of definition in the INDC itself (in quantitative terms on the level of peak emissions, the date at which the peak will be arrived at) would call into question the relationship of the INDC to the mitigation outcomes (for more on this relationship, see chapter 3 in this paper). United States The United States is the world’s second largest emitter and is especially relevant because of its engagement and role in negotiating the Paris Agreement after declining to participate in the Kyoto Protocol. The US intends to achieve an economy-­‐wide target of reducing its greenhouse gas emissions by 26%-­‐28% below its 2005 level in 2025 and to make best efforts to reduce its emissions by 28%, which it intends to accomplish on its own, without the use of international market mechanisms (USA 2015). Although the US does not intend to make use of international market mechanisms to fulfil its NDC, the theoretical application of a Kyoto accounting approach would also be difficult in the US case for a number of reasons. Importantly, US indicates a range of possible reductions between 26-­‐28% by 2025; which implies that any theoretical trading under a budget approach would require a further clarification of where in that range it is willing to commit itself to. Further, the US is one of 9 countries to use a target year of 2025 whereas most other countries (72.1%) use 2030 as their target year. In theory this could be translated into a budget and traded as well for the time period indicated, but would add an element of 6
China. Submission on Consideration of Establishment of Market-­‐Based Mechanisms under the AWG-­‐LCA. March 21, 2011. ; China. Submission on Various Approaches and the Established Market-­‐Based Mechanism. April 11, 2012. http://unfccc.int/resource/docs/2012/awglca15/eng/misc06.pdf 7
IISD (2015). Summary of the Geneva Climate Change Conference. Earth Negotiations Bulletin. 16 February 2015. Pg. 5. 18 complication especially as it is not indicated if the range represents a time period budget (as is the case with most base year targets. European Union The EU is the third largest global emitter and the demand created by accepting CERs and ERUs into its emissions trading system was the single largest driver of the market for those units. The EU committed itself to a target of at least 40% domestic emission reduction in greenhouse gases by 2030, similarly without any contribution from international market-­‐based mechanisms. Although the EU is explicit that there will be “no contribution from international credits” towards its target, EU climate policy is fundamentally based on the Kyoto accounting approach both with regard to the ETS sectors and non-­‐ETS sectors among major emitters, and such an accounting approach would potentially be the simplest with the EU INDC. One complication is the participation of Iceland, Norway, and Lichtenstein in the EU ETS as well as potential future linking to Switzerland. The participation of these countries in the EU ETS may not be as the same “international” as using “international credits” (a special provision was made for such a case in the Paris Agreement’s Article 4.16-­‐4.18), however Iceland, Norway, Lichtenstein and Switzerland have their own independent INDCs where several of these countries have made their intention to use international credits clear in their INDCs. While this may not affect sectors under the EU ETS, it may affect how they reach their overall goals and participation in EU effort sharing decisions. India India is the next largest emitter accounting for approximately 6.75% of global emissions, and was, after China, the next largest source of CERs under the Kyoto Protocol. India further submitted a number of intended contributions of different kinds: 1. "To put forward and further propagate a healthy and sustainable way of living based on traditions and values of conservation and moderation. 2. To adopt a climate friendly and a cleaner path than the one followed hitherto by others at corresponding level of economic development. 3. To reduce the emissions intensity of its GDP by 33 to 35 per cent by 2030 from 2005 level. 4. To achieve about 40 per cent cumulative electric power installed capacity from non-­‐fossil fuel based energy resources by 2030 with the help of transfer of technology and low cost international finance including from Green Climate Fund (GCF). 5. To create an additional carbon sink of 2.5 to 3 billion tonnes of CO2 equivalent through additional forest and tree cover by 2030. 6. To better adapt to climate change by enhancing investments in development programmes in sectors vulnerable to climate change, particularly agriculture, water resources, Himalayan region, coastal regions, health and disaster management. 7. To mobilize domestic and new & additional funds from developed countries to implement the above mitigation and adaptation actions in view of the resource required and the resource gap. 19 8. To build capacities, create domestic framework and international architecture for quick diffusion of cutting edge climate technology in India and for joint collaborative R&D for such future technologies." India also makes no reference to international markets or emission unit transfers in its INDC. A Kyoto accounting approach to accounting with transfers to or from India’s INDC would be particularly difficult given India’s intended contributions: the first two targets are not quantifiable in terms of greenhouse gasses, the second target would require an estimate of GDP which is not provided, and the rest are intended policies and actions – equally non quantifiable in terms of overall greenhouse gas emissions. The Russian Federation With over 5% of global emissions, Russia is the world’s fifth largest emitter. As an Annex B country under the Kyoto Protocol, it also played a major role in the global “hot air” oversupply of AAUs. Given its Kyoto legacy, Russia has also expressed its target as a base year namely by limiting its anthropogenic emissions to 70-­‐75% of 1990 levels by the year 2030. This is however qualified by saying that this target “might be a long-­‐term indicator, subject to the maximum possible account of absorbing capacity of forests”. Russia explicitly says that the “indicator is to be achieved with no use of international market mechanisms”, but a Kyoto accounting approach could in theory be easily applied although this would likely reintroduce the “hot air” issue back into the Paris Agreement were any other Parties willing to buy Russian credits. Japan Japan is the world’s next largest emitter, a Kyoto Annex B Party, and was an early source of demand for CERs, ERUs and AAUs in the Kyoto Protocol’s first commitment period (it declined targets in the second commitment period). Also consistent with its legacy as an Annex B country, the Japanese INDC is stated as a base year target namely as 26.0% reduction by fiscal year (FY) 2030 compared to FY 2013, this is further approximately quantified to be 927 million tCO2. The Japanese Joint Crediting Mechanism is cited as a measure to “appropriate evaluate” Japanese emission reductions in developing countries, which Japan expects to contribute 50-­‐100 million tCO2 (apart from private sector contributions). Given the Japanese base year target, a Kyoto accounting approach would be fairly simple as far as counting progress towards its INDC although no indication is given with regard to how Japan thinks that the JCM could or should be accounted for in terms of developing countries’ INDCs. Brazil Brazil is the world’s next largest emitter after Japan and it was the next most significant source of CERs after China and India under the Kyoto Protocol. Brazil joins a handful of non-­‐Annex B countries that have stated their INDC as an economy wide reduction of 37% below 2005 levels in 2025, as part of a subsequent indicative contribution of 43% below 2005 levels in 2030. 20 A reflection of the uncertainty around the role of international markets or transfers in the Paris Agreement, Brazil reserves its position and declined to specify what if any role markets would play in its INDC but made it clear that it “will not recognize the use by other Parties of any units resulting from mitigation outcomes achieved in the Brazilian territory that have been acquired through any mechanism, instrument or arrangement established outside the Convention, its Kyoto Protocol or its Paris agreement”. Regardless of the eventual Brazilian use of international market mechanisms, Brazil’s INDC is therefore one of the most compatible with a Kyoto approach to accounting. Ethiopia Although not a major emitter, Ethiopia is a good example of a both a fixed year target, which is further elaborates into a reduction from (BAU) baseline target. Ethiopia intends to limit its 2030 net greenhouse gas emissions in 2030 to 145 Mt CO2e or lower, it expects this to constitute a 64% reduction (255 MtCO2e) reduction from the projected ‘business-­‐as-­‐ usual’ (BAU) emissions in 2030. No indication is given if this is considered to be a budget over a given time period, but it could in theory easily be converted into a QELRO Ethiopia “intends to sell carbon credits during the period” the proceeds of which it hopes to use for green economic development. An accounting approach for the sale of these credits is not specified, but Ethiopia further expresses its support for the “development of effective accounting rules under the UNFCCC to guarantee the environmental integrity of market mechanisms. While theoretically compatible with a Kyoto accounting approach (if it were converted into a QELRO), it is not clear however whether the ramifications of such a commitment can be accommodated without an accounting framework that either prevents or, at the very least, highlights the potential for double counting of environmental outcomes where Ethiopia reduces and claims it as its own reduction while also selling credits included in its reduction to others. 2.5 General conclusions on INDCs and carbon markets Political developments are dynamic and willingness and ambition of countries may differ from what previous governments may have (even recently) submitted, however, in many cases, INDCs are the result of an extended stakeholder process within countries and must be taken as an indication of various countries’ intentions. In the post 2020 world, the INDCs generally reflect the expectation that Annex 1 countries submit their targets in base year terms (though none have actually specified these as QELRO budgets per se). Somewhat surprisingly, a number of non-­‐Annex 1 countries have also taken this approach. Many countries from a range of development levels have adopted a deviation from BAU approach, while both emerging economies and developing countries have submitted policies, measures and actions. The challenge of accounting under the Paris Agreement will be to accommodate the variety of contributions and even more so to accommodate trading based on new transparency provisions and new rules, modalities, and procedures for trading which we explore in the next chapter. 21 3 The Paris Outcome on Markets: an assessment of the accounting provisions The outcome of the Paris discussions on markets was surprising in its breadth. Article 6 of the Paris Agreement has three different provisions, mirroring the negotiations on markets as they evolved since the Bali Action Plan discussions: a general framework for approaches that involved the transfer of mitigation outcomes, reflecting prior discussions on a “framework for various approaches”, now termed “cooperative approaches”; a separate “mechanism to contribute to the mitigation of greenhouse gas emissions and support sustainable development”, that presents many of the features that had been under discussion under the guise of a “new market mechanism” or a “CDM+”; and a framework for non-­‐
market approaches which had often been a used as a counter to flexible mechanisms in the negotiations. Tied in closely with this outcome is the issue of how both these articles and the approaches therein are to interact with the general construct of the Paris Agreement and in particular how to account for these approaches in relation to the NDCs. 3.1 The Outcome: an analysis of the text Article 6 starts with the recognition “that some Parties choose to pursue voluntary cooperation in the implementation of their NDCs”. Article 6 implies that this voluntary cooperation may take one of three forms: cooperative approaches that involve the use of internationally transferred mitigation outcomes; a mechanism to contribute to the mitigation of greenhouse gasses and support sustainable development (already colloquially referred to as the “sustainable development mechanism” (SDM), which we use for simplicity); and a framework for non-­‐market approaches. Although the word “market” is not specifically mentioned in the text (except the establishment of framework of non-­‐market approaches), it is commonly accepted that the first two forms of cooperation represent a new kind flexibility mechanism, which forms the basis of a new carbon market. Although non-­‐market approaches may be implemented through voluntary cooperation as well and are found in the same Article, we make the assumption that this framework will not involve international unit transfers and therefore not pose the same challenges to accounting as the other two provisions. 3.1.1
Cooperative Approaches involving the use of ITMOs Article 6.2-­‐6.3 identifies a number of features of cooperative approaches: Voluntary nature: Cooperative approaches are restricted to a “voluntary basis”, indicating that Parties must accede to these on a voluntary basis. It also implies that no provisions in terms of the accounting structure underpinning these approaches can be imposed to parties not engaging in them. For market-­‐
based approaches, this in turn implies that such infrastructure as may be required for tracking of transfers of units must be accepted by Parties on the national level. Under Kyoto, the accounting of QELROs was an integral part of the accounting system and Parties were required to have, e.g. a registry, even if they did not intend at all to engage in international trading. With the Paris Agreement, Parties not wanting to engage In cooperative approaches will not need any additional infrastructure beyond their already existing inventory obligations 22 Internationally transferred mitigation outcomes (ITMOs) ]are the subject of the envisaged cooperation. No guidance is given on what a “mitigation outcome” may represent. However, the fact that separately, under para 37 of Decision 1/CP.21, “adjustments are made by Parties to their nationally determined contribution” would indicate that the metric should be one similar to that which is expressed in the NDCs. For most NDCs, this corresponds to an adjustment of their inventory in relation to the NDC. Use towards NDCs: Cooperative approaches involve the “use of internationally transferred mitigation outcomes [ITMO] towards nationally determined contributions”. It is interesting to note therefore that the point of regulation here is that of “use towards NDCs”. Parties therefore decided to exclude issues of generation or transfer from the purview of the article, except if these were to have an impact on the use towards NDCs. Also excluded are therefore any domestically transferred units and any units that are not used towards a Party’s NDC. An emerging question relates to the wording “mitigation outcome”. In carbon trading, entities or governments trade usually in either allowances or credits, units related to either a limited right to emit or an emission reduction from baseline. The wording “mitigation outcome” seems purposefully meant to broaden the scope of what could be internationally transferred, without a strict 1-­‐to-­‐1 relation to unit holdings in a registry. This raises the possibility of periodic reconciliation between Parties (net transfer accounting) based on a mutually agreed definition of mitigation outcome, instead of an automatic transfer of units akin to the Kyoto Protocol. This in turn raises the possibility of strong mismatch between the “trading” and “accounting” sides, which may give rise to issues on limitations on trading behaviour (akin to the “commitment period reserve” concept of the Kyoto framework. Yet another separate question is whether an emission allowance can be conceived of as a “mitigation outcome”, or whether only units generated ex-­‐post mitigation can effectively be transferred, as would happen under a crediting scheme. In the sense that any emission allowance sold is the product of at least an expectation of future mitigation (in that it is no longer to be used by the seller) this should not pose any issues of interpretation in extending this to emission trading systems. Another interpretation could distinguish between trading allowances through linked emissions trading systems and a regular exercise of “netting out” the balance of those trades as an accounting practice of ITMOs. Promotion of sustainable development: replicating earlier language from the Clean Development Mechanism, approaches should “promote sustainable development”, although in practical terms it may be difficult to agree on the operative conditionality of a sustainable development or co-­‐benefit criteria. Environmental integrity and transparency, including in governance: Cooperative approaches must ensure “environmental integrity and transparency”. This would indicate the need for any cooperative approaches to report internationally in terms of the underlying mechanism, the generation of ITMOs, the governance system (including any verification or auditing functions) and possibly an assessment of their environmental integrity. Robust Accounting. Further, where such cooperative approaches are implemented, parties “shall apply robust accounting to ensure, inter alia, the avoidance of double counting, consistent with guidance adopted by the COP serving as the meeting of the Parties to the Paris Agreement” (CMA)”. This implies a clear awareness of the danger of double counting and emphasizes the importance of developing multilateral guidance which is to be adhered to. 23 Issues of metrics Paragraphs 31 and 32 of the Decision then instruct the Ad Hoc Working Group on the Paris Agreement (APA) to elaborate guidance that ensures that Parties account for emissions and removals in accordance with methodologies and common metrics and ensure methodological consistency between the communication and implementation of NDCs. The joint reading of these paragraphs with Article 6 and the accompanying paragraphs thereunder implies that effectively “ITMOs”, however they may come to be described, should follow similar common metrics across a diversity of NDCs and are likely to be an expression of either an emission unit (e.g. a tonne of CO2e) or an emission reduction (also a tonne of CO2e). As mentioned above, one interpretation may limit ITMO’s to a unit of account for a netting exercise between Parties, which could conceivably separate a unit for unit trading exercise from the final accounting. Issues of coverage For non-­‐economy-­‐wide NDCs (i.e. “sectoral targets”), it is conceivable that mitigation outcomes could be domestically transferred from outside the INDC scope into it (depending on what the NDC is). This would call for international oversight of such generation and transfer of assets, as these would have an impact on the nature of the commitment itself. The lack of oversight of any units generated outside of the NDC and used towards it could jeopardise trust in the integrity itself of the mechanism. At the very least, reporting on the use of such units and on their features would be required. INDCs
Units
Units
Given the wording of Article 6, additional attention must be placed on the range of instruments that can assist countries in their NDCs and how to account for these. A situation under which the scope of INDCs is not economy-­‐wide could lead to a lowering of the environmental integrity of the NDC if domestic offsets were to be used to contribute to the target. Currently, the international agreement does not address such issues. Noting that article 6 refers to the accounting of ITMOs or SDM units towards use in meeting NDCs, article 6 could conceivably be used to back up the transfer of mitigation outcomes between sub-­‐national domestic cap-­‐and-­‐trade schemes in complement to the national INDCs as accounting exercise. 24 IND
Cs
Units
Units
INDCs
Uni
One example of such a transfer could theoretically be the linking of the Californian and Quebec cap-­‐and-­‐
trade schemes, which will eventually result in the net transfer of units between these two schemes. This precedent does not present an issue in terms of overall accounting between US and Canadian future commitments, because the Californian and Quebec cap-­‐and-­‐trade schemes are based on subnational legislation and independent and unrelated to the national pledges unless such provisions are made. Nevertheless, if one or both Parties wants to see the net outcome of this link reflected under their NDC accounting (conceivably more likely for Canada given Canada’s openness to international transfers for its INDC). Given also that the two subnational governments have agreed to joint full auctioning of their common emission trading units, the issue could entail the development of some bubble agreement across jurisdictions. The recent revival of proposals for the California cap and trade system to accept sectoral REDD+ credits from other subnational jurisdictions such as Acre in Brazil or Chiapas in Mexico could in theory make accounting much more complicated given the different contributions put forth by the Brazilian and Mexican national governments, and the Californian link to Quebec8. It is also important to note that in its NDC, Brazil explicitly reserves the right not to recognise such sub-­‐national transactions, if not cleared through the Brazilian federal government. The US has also clarified that it intends to achieve its NDC target without international units and based on its inventory alone regardless of what kind of compliance credits subnational jurisdictions may choose to develop or recognize9. The figure above also presents an additional challenge to the wording of Article 6 in the Paris Agreement. Depending on the scope of INDCs, the origin of any mitigation outcome could either be covered or not. If the scope of the INDC covers the source of emission reductions, then and in accordance with paragraph 37 of the Decision, a corresponding adjustment must be made. Given the requirement for adjustment, this situation is akin to that of Joint Implementation under the Kyoto Protocol, and assuming that the issue is relevant enough for it to have an impact on achievement of the INDC, the “seller” Party will have 8
See California Air Resources Board Staff White Paper http://www.arb.ca.gov/cc/capandtrade/sectorbasedoffsets/ARB%20Staff%20White%20Paper%20Sector-­‐
Based%20Offset%20Credits.pdf 9
This is further made clear by the fact that for the US EPA’s Clean Power Plan, nationwide reporting for the electricity sector is the only gauge of compliance. US emitters in the electricity sector cannot count any foreign or domestic units towards compliance no matter what state or other regulatory structure they may find themselves in. 25 an incentive not to over-­‐sell, as each unit exiting its INDC scope will not be available anymore for demonstrating achievement. However, if the mitigation outcome is itself not covered by the INDC, then the situation closely resembles that of the Clean Development Mechanism in that the sources are not covered by any commitment. Under the Kyoto Protocol, this resulted in the need for a much more extensive regulatory system to ensure additionality of any units generated. Even if a mitigation outcome occurs outside the boundary of an INDC, it could conceivably indirectly impact the INDC itself. In the discussion on the first EU Linking Directive, which allowed for the use of JI and CDM units in the EU ETS, an analogous situation was discussed. At the time, several EU Member States had developed JI projects which had a bearing on the level of emissions inside the EU ETS, even if these projects themselves were not covered by the system (a typical example would be a wind power plant providing energy to a grid, leading to decreased emissions inside the scope of the EU ETS). This indirect double claiming was resolved by ensuring that Member States that wished to continue their JI projects would need to factor out this incentive from the effect on ETS-­‐covered sectors. The sheer complexity of the exercise effectively led to the discontinuation of such JI projects. Given however the decentralised system of the “cooperative approaches” of Article 6.2, addressing this issue will require a number of enhancements in guidance to be developed, essentially amounting to a review of the governance of the “seller” country and the integrity of the units generated. These would include: -­‐
-­‐
-­‐
international oversight of unit generation, ideally; limits on “selling” increased share of “own contribution”, while noting that these last two do not address the issue entirely but only work to minimise the damage to integrity from such “uncovered” sources. Issues of form As noted in Section 2, the INDC process produced a number of different kinds of NDCs. As discussed above, these different forms impact the ability to trade. In particular, ability to trade will depend on the convertibility into a common metric and the compatibility of vintages between targets. Common metric convertibility COP 21 Decision 37 requests the SBSTA to develop and recommend guidance for cooperative approaches, “including guidance to ensure that double counting is avoided on the basis of a corresponding adjustment by Parties for both anthropogenic emissions by sources and removals by sinks covered by their NDCs”. This presupposes that the progress towards the achievement of an NDC can be measured in tonnes of emissions, which many NDCs cannot be, most notably for policies and actions. In turn, this implies that, at least for a set of NDCs, the basis for accounting of any transfers cannot be an inventory, but rather another basis which may take as starting point or reference the inventory, but is distinct from it. The request for guidance assumes a common metric, without which, it is not possible to to “add and subtract” as envisaged under Decision 37. However, as seen above, a plurality of NDCs rely on baseline targets. Other targets are comparable in structure to a “budget approach”. Where NDCs are defined as a 26 deviation from BAU, and this is not fixed ex ante, ability to trade will require the definition of a “mitigation outcome” out of an NDC that is itself not well defined. Accounting for an ITMO could then be reflected based on: -­‐ a calculation “ex post” of a particular addition/subtraction from an inventory-­‐based calculation. CASE 1 Country A acquires from Country B a total of 1 000 000 tCO2e. Country B has a deviation from BAU target, i.e. 10% below BAU. BAU is calculated for the year/period in question to be 35 MtCO2e. The country’s targeted reduction therefore would have been 3.5 MtCO2e, but must be adjusted up to 4.5 MtCO2e. The relevant NDC target is then 35-­‐3.5+1. -­‐ an adjustment to a reference level independent from the calculation required for the NDC. Alternatively countries could decide instead, based on the quality/type of NDC to consider limiting the potential for transfers by requiring the adjustment to be made to a different reference point, such as average historical emissions over a number of years (note the precedent of the Doha amendments) CASE 2 Country A acquires the same amount as in case 1 from country B. The relevant basis for the adjustment is a reference point, such as average emissions of last three years prior to entry into force of Paris Agreement. This would implicitly assume a separate budget-­‐like accounting provision for accounting of ITMOs separate from the NDC calculation CASE 3 Accounting could also be made on the basis of specific modalities for each type of NDC, including deviation from BAU targets, attempting to convert these to a “budget-­‐like” target. In turn, and for the case of BAU targets for example, this would imply an evaluation of the BAU calculation and its quality. Nevertheless, it is noteworthy that the transparency framework under Article 13 is to develop guidance to ensure methodological consistency, including on baselines. This provides an opening for the development of such guidance that could be of use in ensuring that comparability in relation to either the generation or use of ITMOs. Further, guidance could be developed that allowed for ex ante trading of mitigation outcomes with some mechanism to “make the system whole” should ex post calculation result in a finding that too many units had been transferred. These mechanisms could take the form of a unit reserve or a “buyer liability” mechanism. Vintage compatibility With budget approaches, or any approach than can be converted into a multi-­‐year absolute target, the use of units of mitigation outcomes from different vintages poses some challenges to environmental integrity (as was noted under Kyoto and addressed under the Doha amendments). Nevertheless, if the 27 “time coverage” of the commitment extends to that of the vintage unit, the overall trade lies within a capped environment. It follows that while banking may extend and aggravate any inadequacy of the targets to future periods; this is more a reflection of the lack of ambition of the targets than any flaw in the banking/borrowing provision. If NDCs are defined as single year targets, i.e. achieving x reductions (or even x emissions) on a specific year, there is a question so as to if trading would allow for credits or debits from different years to count towards that target. If they could, this could leave the door open to the use of vintages (banking) not covered by any commitment. Again the issue is analogous to that of scope. Where achievement of a single-­‐year target is allowed on the basis of use of emission units from vintages not covered by any commitment, it must be ensured that such units reflect real emission reductions. Furthermore, over-­‐
reliance of vintage units to comply in a single-­‐year target would result in a significantly less ambitious target to begin with. In this respect, Article 6 is silent, and further guidance should be developed. Such guidance could take the form of requiring that countries taking on single-­‐year targets either do not use non-­‐covered vintages towards compliance with those targets, or that corresponding adjustment in respect of units is on the basis of annual average over the length of a programme. 3.1.2
The Mitigation and Sustainable Development Mechanism (SDM) The Mitigation and Sustainable Development mechanism as established under Article 6.4 provides for a centralised mechanism in the carbon market, which may represent an alternative to cooperative approaches. The mechanism has as its main features: •
•
•
•
•
•
•
•
It is established under the authority of the CMA International supervision by a body designated by the CMA It aims to promote the mitigation of GHG emission while fostering sustainable development Participation by public and private entities authorised by a Party Contribution to reduction of emission levels in the host Party The local party should benefit from the mitigation activities Mitigation activities can also be used by another Party to fulfil its NDC Share of proceeds to cover administrative expenses and go to assist particularly vulnerable developing countries adapt to climate change All these features are shared, at least in part with the existing mechanisms under Kyoto, both in terms of governance and participation of private sector. Nevertheless, the Article critically includes two other features, namely that it should deliver an overall mitigation in global emissions and that it should avoid double counting. Delivery of overall mitigation in global emissions Unlike the CDM or JI, the SDM is to deliver overall mitigation, which should imply therefore a move away from pure offsetting. If the SDM is conceived as a baseline-­‐and-­‐credit mechanism, operationalizing this provision could be done in a number of ways: 28 -­‐
allowing for a proportion of emission reductions from baseline not to be credited (or be credited and cancelled); -­‐ ensuring that baselines used for crediting are conservative. The Paris Agreement does not specify if the SDM can operate under the NDC, which would give it certain parallels with JI, or outside the scope of the NDC, which would give it parallels with the CDM. The relationship between the SDM and the host NDC is crucial. In particular for baseline targets, compatibility between baseline scenarios for the NDC and for the SDM must be ensured. At the very least, the SDM baseline should not be more conservative than that used for the SDM. If a country’s NDC is established as a deviation from BAU, then units transferred out of that country’s NDC through the SDM will negatively impact achievement of the NDC. Accounting for the SDM and cooperative approaches would both be equally stringent. Avoidance of double counting, The avoidance of double counting is referred to in the Agreement as “emissions reductions resulting from the mechanism [...]shall not be used to demonstrate achievement of the host Party’s NDC if used by another Party to demonstrate its NDC” (Article 6.4 c). As previously discussed, with the CDM, double counting towards UNFCCC obligations was not an issue because non-­‐Annex 1 countries had no obligations to count achievement towards. Now that all Parties have NDCs, depending on the NDC, there are obligations that must be counted against. 3.1.3
Comparing Cooperative Approaches and the SDM Article 6 names and describes the flexibility mechanisms of Cooperative Approaches and the SDM. It is however unclear how they will interact with each other and the varied NDC landscape. The guidance that the SBSTA has been requested to develop and recommend in paragraph 37, Dec.1/CP.21 refers to Article 6.2, but not specifically to Article 6.4. How are the units produced by the SDM different from ITMOs in Article 6.2? Will they be counted differently than ITMOs? Depending on the interpretation, some groups may read the text as implying that cooperative approaches are bilateral or collective initiatives between a group of Parties not entirely under the auspices of the CMA, while the SDM is established under the authority and guidance of the CMA. How much oversight will the CMA have when it comes to the cooperative approaches of Parties? “Guidance” is clearly a competence of the CMA. While the application of robust accounting under cooperative approaches should “ensure the avoidance of double counting”, emission reductions from the SDM “shall not be used to demonstrate achievement of the host Party’s NDC if used by another Party to demonstrate achievement of its NDC”. Is there a practical difference for accounting purposes for these two references to double counting? If a Party’s NDC is not expressed in terms of a GHG metric, will the demonstration of its achievement be independent of any transfers using either of the provisions? 29 Both public and private entities clearly have a role in the SDM, but cooperative approaches mentions no presumed role for private entities. While cooperative approaches are meant to “promote sustainable development”, the SDM is supposed to “foster sustainable development”. Will a requirement check actually be operationalised for either of these provisions? Will such a requirement be similar or different? Is there a difference between “promoting” and “fostering” sustainable development? While the SDM is meant to “contribute to the reduction of emission levels in the host Party”, the lack of a similar provision under cooperative approaches would seem that there is no requirement for a host Party’s own contribution (the contribution is deemed to be the NDC itself). Similarly while the SDM should “deliver an overall mitigation in global emissions” and “ensure that a share of the proceeds” is used to cover administrative expenses and to assist particularly vulnerable developing countries to meet the cost of adaptation, there are no such provisions for cooperative approaches. If the units from cooperative approaches and the SDM are equally valid in terms of fulfilling NDC’s, the two provisions may compete against each other. In such an instance, the SDM is likely to have a disadvantage if a portion of units have to go to the host country, a portion are for net mitigation, and a portion of proceeds go to administrative costs and adaptation in developing countries. Table 2: Comparing Cooperative Approaches and the SDM Cooperative Approaches The SDM Implied to be bilateral or among a group of Multilateral, under the authority and guidance Parties of the CMA, supervised by a body designated by the CMA Robust accounting shall be applied consistent SBSTA to develop and recommend rules, with guidance adopted by CMA modalities, and procedures SBSTA to develop and recommend guidance “ensure the avoidance of double counting” “shall not be used to demonstrate achievement of the host Party’s NDC if used by another Party to demonstrate achievement of its NDC” General role for private entities unclear Incentivise and facilitate participation by public and private entities “promote sustainable development” “foster sustainable development” -­‐ “contribute to the reduction of emission levels in the host Party” -­‐ “deliver an overall mitigation in global emissions” -­‐ Share of proceeds for administrative expenses and for adaptation in vulnerable countries 30 3.1.4
Provisions for Transparency under the Paris Agreement: an assessment Despite the larger variety of kinds of contributions, the further development of accurate and transparent accounting frameworks will be key in the Paris Agreement and its implementation process with regard to not only individual countries’ efforts and accounting for trading between parties, but also in order to better gauge progress to addressing the overall mitigation gap and building trust not only in negotiations between 2015 and 2020, but also for future rounds of review and revision. Levin et al (2015) outline a number of accounting aspects to facilitate robustness and transparency that should be present in the Paris outcome: •
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First, common metrics and inventory methodologies: o Common methodologies for national inventories using the latest IPCC guidelines. o Common global warming potential values, using the latest science. o Common greenhouse gas and sectoral coverage for economy-­‐wide goals. o Common base year for economy-­‐wide goals whenever possible (taking account of national circumstance, perhaps allowing for reference years). Second, principles for land sector accounting, including minimum thresholds for coverage of emissions and removals in the sector. Third, principles for accounting for transferable emissions units, including quality principles governing units and the prohibition of double counting. Fourth, a mandate to further elaborate accounting rules the following year, based on the agreed upon principles and common metrics. Additional rules will be required for certain contribution types (e.g. baselines for any baseline scenario goals; metric of output for any intensity goals), accounting for the land sector, use of transferable emissions units, evaluation of progress and achievement, among others. The Paris Agreement establishes in its Article 4.13, the principle that “Parties shall account” for their NDCs, based on the principles that guide the development of reporting under the UNFCCC of “transparency, accuracy, completeness, comparability and consistency”, supplemented with the principles of environmental integrity and avoidance of double counting. These principles must be operationalized in accordance to guidance to be established. Article 13 then establishes an enhanced transparency framework in Article 13. In terms of action, the purpose of the framework is explicitly to “provide a clear understanding of climate change action in the light of the objective of the Convention” (Article 13.5). In contrast to Kyoto, progress toward the overall goal will be gauged by a vast expansion of reporting obligations, notably by developing countries “recognizing the special circumstances of the least developed countries and small island developing States” (Article 13.5), where all Parties regularly provide “a national inventory on anthropogenic emissions by sources and removals of greenhouse gasses using good practice methodologies accepted by the IPCC and agreed upon by the COP serving as the CMA” and “information necessary to track progress made in implementing and achieving its nationally determined contribution” (Article 13.7 a and b), including therefore any information that is not included in the inventory itself and which may be relevant 31 for the “corresponding adjustment” provision. Information provided is to undergo a technical expert review (Article 13.11) and include a review of the consistency of the information with the modalities, procedures and guidelines (Article 13.12) to be adopted at the first session of the CMA (Article 13.13). Article 13 and accompanying paragraphs of Decision 1/CP.21, outlines a process whereby future guidance will be developed which may enable convergence on common metrics and inventory methodologies over the coming cycles of submission of NDCs (paragraphs 31 and 32 of Dec. 1/CP.21). Although submitted INDCs do not currently share form in terms of the kinds of contributions, it can be hoped that in the coming cycles, with increased transparency, new rounds of NDC will start to converge to become more comparable. Paras 31 and 32 in fact do not make any reference to ITMOs. Only indirectly are any such transfers mentioned in para 37, where guidance is to be established on avoidance of double counting (to the extent that countries want to use international markets to demonstrate achievement with their NDCs). This decision paragraph sets out the framework for the work to be undertaken on carbon market accounting. The Paris outcome generally scores reasonably well on the issue of the importance of avoiding of double counting but leaves unresolved issues related to trading different vintages and quality of units (lack of guidance on development of baseline methodologies). These issues could still theoretically be settled through the development in particular of the guidance in relation to corresponding adjustment and the key issue of the basis or reference for adjustment. Parties will need to develop such additional rules. Any assessment of the Paris Agreement based on Levin’s criteria is still premature. In terms of common metrics, inventory methodologies, and principles for land sector accounting, it remains to be seen how quickly the monitoring reporting and verification and general inventory capability of non-­‐Annex 1 countries can be developed. Article 4.13 clearly enunciates the key principles of the accounting regime, including the use of the key principles used in reporting on the convention. Article 13 of the Paris Agreement on transparency does not provide any further specific guidance on accounting for transferred emissions units, aside from inventories (Article 13.7 a), and the reporting of information necessary to track progress in implementing and achieving the NDCs (Article 13.5 b). At the same time, Article 6 recognizes and creates new flexibility to transfer emissions units. This flexibility and the intention of some parties to use it however complicates what otherwise would be a fairly simple accounting exercise. Further guidance should be developed, not only under Article 6, but also as part of Article 13 to evaluate and oversee the accounting process, particularly with regard to flexibility on transferred emissions units. 3.2 Open issues 3.2.1
Unpacking the issue of the relationship between crediting mechanisms and NDCs: the precedent of the E+/E-­‐ discussion Under Kyoto, developing countries did not have any mitigation commitments. Given that the Clean Development Mechanism rewarded reductions from a baseline, it implicitly rewarded situations in which projected emissions would increase substantially in the absence of the credited project. This led to a discussion of a potential “policy freezing” (Samaniego and Figueres, 2002) effect in which host countries 32 would freeze policies, or not implement further policies with a positive impact on emission reductions (so-­‐called E-­‐ policies) in order to develop more projects. In turn, this would lead to a substitution of domestic action for foreign incentives. So as to avoid this, the regulatory body developed guidance under which such E-­‐ policies would no longer be considered in the calculation of baseline: countries could institute new mitigation policies, but be credited from a baseline that assumed that such policies did not exist. Eventually, this decision became contested, as ignoring away the effect that E-­‐ policies would have been unrealistic, and increasingly so, over time, as more and more countries would take on, for domestic policy reasons, progressive renewable energy and climate policies in order to increase the deviation from the theoretical baseline from which credits were issued. It got to the point that in some countries, the exact role of the CDM in some sectors was questioned. This issue was never adequately resolved in the CDM context. An important evolution in the regime is that, as stated before, countries with NDCs (in particular if these have been ambitiously framed) will now have an implicit trade-­‐off in engaging in international transfers. Countries should want to retain and use cheap abatement options rather than sell these away. Already in the evolution of the CDM market towards the use of CERs for domestic emission trading schemes (and away from international trading) one can see the reflection of this new position. Still, is the existence of the flexibility mechanism under Article 6 a disincentive for developing countries to increase their ambition in future rounds of stocktaking under the ambition mechanism? Flexibility in terms of transferred mitigation outcomes should “allow for higher ambition”, but the more ambitious countries are, the less can they transfer internationally and still reach their own NDC target. If the crediting baseline were “frozen”, it would do away with the disincentive to become more ambitious, but increasingly diverge from the reality on the ground of what developing countries are actually implementing on the ground. Although not an accounting issue per se, the alternative approach of adding exported units to a country’s inventory “increases” that county’s emissions. The same issue now comes back in the form of “policy additionality” to INDCs. In a world in which developing countries now have mitigation commitments, the generation of credits (as intended by many developing countries, including many with baseline targets) requires a determination of whether mitigation outcomes resulted from efforts made by the host country to achieve its INDCs or if it was the result of an activity that would have been carried out under a non-­‐NDC scenario. The issue is not restricted to crediting mechanisms. Cap-­‐and-­‐trade, if envisaged under either the cooperative approaches or the SDM, could also lead to a discussion of the “policy additionality” which in this case would essentially be a discussion as to the level of the baseline under which the caps were established. Discussing baseline issues at a sector level and in consideration of a specific project led to several thorny discussions between Parties to the Convention and the CDM regulatory body. It should only be expected that such issues would become more serious with an implicit assessment of policy additionality to what is essentially a sovereign commitment. How then to address these in the framework of the current INDCs? A first starting point would be to define a set of minimum criteria for the establishment of baselines or allocations. A similar (not very successful) experiment occurred with the first and second period of the EU ETS in which Member States in charge of cap-­‐setting were given a set of generic guiding principles to 33 guide cap-­‐setting and allocation decisions in their National Allocation Plans. This would require therefore principles in relation to: -­‐ drivers to be considered when developing emission baselines or reference levels (expected economic development, structural change in economies, etc...) -­‐ criteria on assessment of adequate “deviation from business-­‐as-­‐usual” both in the setting of crediting thresholds and caps. Ideally, these criteria could take the form of performance benchmarks, similarly to that which has been adopted under the EU ETS for sectors given free allocation. Performance benchmarks could be used with advantage as criterias for adequate references and could be built to accommodate differences in national circumstances. Note that these are equally relevant across base year targets, baseline targets or intensity targets. A number of processes and projects at the international level already developed guidance on the establishment of projections and could be used as a starting point (see for example, MAPS project or IEA projection work). However, by connecting these exercises to the definition of what are essentially the possibilities for engagement in international mechanisms, projections acquire a fundamental economic value far beyond the normally more “academic” realm in which these exercises have been rehearsed to date. A second step would be the definition of a governance model that would lead to the assessment of such criteria, which would preserve the integrity of the results of these exercises, while respecting national sovereignty. 3.2.2
The treatment of CDM and JI under the Paris Agreement Given that there is no sunset clause for the Kyoto Protocol or its CDM/JI mechanisms, they are currently set to continue indefinitely despite the expiration of commitment period(s) 10 for which they were created. To the extent that some parties may want to use CDM units to demonstrate achievement of their NDC. this presents challenges that must be addressed in several respects. In the first instance, CDM projects currently ongoing validation and registration under Kyoto (or already registered) will, on current guidance and unless decided otherwise, be allowed to issue units under Kyoto for a number of years into the first and second cycles of contributions under the Paris Agreement. The overlap of these projects with the contributions obviously presents challenges in terms of double counting. While this is not addressed in the Paris Agreement, the text stresses the importance of avoiding of double counting. Ergo, a contribution under Paris should only be allowed to overlap with the scope of a CDM project if the emission reduction is not counted towards any other contribution for the same vintage. Given that NDCs will become operational as of 2020, it would be important to avoid such overlap. 10
IET however, under which AAUs are traded is dependent on the commitment periods to “create” the units, several countries, by using 1990 as their base year and not accounting for sold AAUs, depending on accounting, may be reintroducing “hot air” back into their targets and double counting sold AAU/ERU units under different commitments under the CMP and the CMA. 34 There is also a potential overlap between the scope of the CDM and the SDM (and potentially Cooperative Approaches). To the extent that these overlap, Parties should not be allowed to arbitrage between these mechanisms by selecting the mechanism with the least oversight and environmental integrity. Together, these CDM issues imply the need for a clear and planned out transition period for CDM, in particular for countries that wish to engage in other mechanisms and notably the SDM. One possibility for such transition would be for Parties to progressively convert such projects either into their own crediting schemes (as China has undertaken with the CCER system11) or for Parties to take charge of the projects and count these projects towards their contributions. Another transition, from CDM to SDM, would need to consider a separate formal transition period, and an evaluation of the ways in which current CDM projects or programmes may satisfy key criteria for the SDM, as spelled out under Article 6.4 of the Paris Agreement (a similar precedent existed for the transition of certain projects from the Activities Implemented Jointly pilot programme to either CDM or JI at the start of the Kyoto Protocol). For a substantial part of the CDM pipeline, where issuance of CERs has already more than covered the additional costs for the project, it would make economic sense for Parties to gather such “low-­‐hanging fruit”. For JI the picture is relatively similar, in particular for countries that have set relatively less ambitious targets (despite the Doha amendments). The question of a transition period for JI into a new SDM is a relevant one, although to the extent that JI presents a model for carving out of commitments, a similar construct could co-­‐exist within the Paris agreement. 3.3 What’s next for the building of a robust accounting regime: two approaches There are at least two routes now open to shaping a new accounting regime in face of the existing diversity of contributions. Under one route -­‐ which we could call “conversion to budget approach” -­‐ as much as possible, existing contributions of diverse types would be converted to a single metric, and a budget would be re-­‐established on the basis of certain conservative assumptions on the parameters defining the contribution. Under a separate approach, which we will call “reference level approach”, a different reference level than a budget could be established. 3.3.1
Conversion to budget Despite the diversity of goals that can already be ascertained from the submission of INDCs, it is already possible to conceptualize tools for enhancing compatibility of different targets. The main starting point here is that the ideal carbon market should be based on a common metric (typically, tonnes of CO2 equivalent) and comprises units, which are deemed of equal value. It is important to note in that respect that carbon “currencies” are in that sense, fiduciary – they obtain their value from the credibility of the commitment behind their generation and the relative supply and demand for their units. Therefore the lower the mitigation ambition, the more units of the “currency” there are, the less they are worth. Beyond the issue of the metric therefore, carbon units should ideally be based on the same level of stringency in relation to their generation, whether they be allowances derived from caps/targets, or 11
South Korea and Mexico have come to similar conclusions and have moved towards converting CDM projects in their countries into sources of offsets for which domestic demand is created via an ETS or a tax. 35 credits derived from baseline-­‐and-­‐credit schemes. It follows therefore that an analysis of “convertibility” between units is equivalent in fact to an analysis of the ambition and robustness of the systems producing these units. As a first step, it is important therefore to ensure convertibility into single metric. In other words, how can CO2e-­‐based units be generated from the goal-­‐setting that INDCs comprise? •
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Base year targets representing total emissions over a given time span would not be an issue, as previously discussed. As with the Kyoto Protocol, it would require having the relevant base year inventory-­‐related calculation (i.e. over the relevant scope of the inventory, for example, excluding LULUCF-­‐related emissions and removals if the NDC would not include these) and translated into an emission budget. Compliance is then a matter of comparing the relevant emissions totals over the period, with the emission budget and net transfers. Baseline scenario goals require either a) setting a baseline ante, or b) instituting a liability rule, whereby any recalculation of the baseline ex post issuance of the unit will result in a compensation by the Party involved (“seller liability”) or by the holder of the unit (“buyer liability”). It is interesting to note that this debate evokes much of the debate that followed the establishment of the rules on article 17 of the Kyoto Protocol. It is clear that Parties reached then a consensus on a “seller liability” system. It is possible to envisage trading between GHG intensity goals by converting these intensity targets ex post facto into CO2e units, once GHG and emissions data are available. Alternatively, conversion into CO2e units could occur ex ante for the purpose of transfers, although any such transfers would probably carry with them liability, as depending on the volume of transfers and its relation to the NDC “budget” the recalculation of the “budget” once the GHG and emissions numbers were known could result in effectively a situation in which the seller should not have transferred such “outcomes”. For commitments on outcome-­‐based policies and actions, conversion into carbon would normally take the form of carbon crediting on the basis of a baseline-­‐and-­‐credit scheme such as the CDM or an advanced form of sectoral crediting. These would require crediting protocols, including specification of baseline calculation protocols. They would also require confronting the issues of policy context (E+/E-­‐ in the CDM “jargon”) and of additionality. Such projects would not be allowed to count for progress towards the non-­‐GHG outcome, whatever that may be. Conversion could also occur on the basis of specific provisions for baselines/targets that can construe notional budgets related to such policies and actions. Even in the case where conversion into an equivalent CO2 metric is assured, Parties that care about the actual robustness and “quality” of any units they are buying internationally would likely require these to satisfy a number of conditions related to the NDC context in which such units would be generated. 3.3.2
Addition and subtractions from a reference level A certain tension between the reality of emissions as reflected in an actual inventory and that of a theoretical budget created by a policy decision -­‐ such as the Kyoto Protocol -­‐ has always existed. “Hot air” in the Kyoto Protocol meant that because actual emissions in some countries were far below their 36 allocation, they could not only not reduce emissions, but in many instances significantly increase emissions and still stay within the budget. Adding further offset credits from outside the original budget, did not contribute to the reduction of emissions within the budget, but rather only an expansion of the budget. The purpose of a budget is to impose scarcity, which if monetized can provide a financial incentive to reduce emissions. If the budget however, does not impose scarcity, as was the case with Kyoto AAU hot air, and allows instead for further increase of emissions and hence the lack of scarcity, as is the case with the importation of credits through the CDM, the point of the policy is defeated. A “corresponding adjustment by Parties for both anthropogenic emissions by sources and removals by sinks covered by their NDCs under the Agreement” could represent a shift towards a new approach of accounting that moves the emphasis of attention from compliance within a theoretical budget, towards the actual and adjusted emissions as reported in the inventory. The credibility of the commitment of an NDC is still important, but the focus is on the addition (for the unit exporter) or subtraction (for the unit importer) to a reference level derived from the inventories: adding and subtracting tonnes of emissions from an inventory fundamentally changes the exercise from buying and selling reductions from a budget (as under EIT and JI) or crediting unit reductions from a theoretical baseline (as under the CDM) to adding to and subtracting from a reference level, which most likely would be based on an inventory of actual emissions adjusted for traded emissions. In essence, the buyer/importer of a transferred unit is paying to have another Party add a tonne of greenhouse gasses to their inventory so that the buyer/importer can subtract it from theirs. If the seller/exporter has reduced actual emissions, the sale has a net zero effect in the inventory (one tonne reduced is one less in the inventory, if sold/exported is then one additional tonne in the inventory through the trading adjustment). If they have not reduced actual emissions (perhaps because they have overstated their theoretical baseline to create more “reductions”), then they are penalized by not having a reduction of emissions reflected in their inventory, plus a corresponding number of tonnes of emissions are then added to their inventory through the transfer. The question is what effect does this change from buying and selling budget units and reductions from a theoretical baseline to adding and subtracting adjusted tonnes to actual inventories (or a reference level derived therefrom) have on the achievement of NDCs? That depends on the NDC. •
For NDCs that are expressed as reductions from a base year or a budget,12 this change of accounting approach does not make a difference in terms of achievement of NDC goals compared with the Kyoto system in that: Parties that have given themselves generous (non-­‐
ambitious NDC goals or “hot air”) will have still have ample room in their NDC to easily achieve it and still export “mitigation” outcomes. The difference is that the exporter’s budget is not reduced directly, but rather an additional tonne of GHG – an adjustment tonne – has been added to his inventory, taking up some of that budget. 𝑃𝑎𝑟𝑡𝑦 𝑖𝑠 𝑁𝐷𝐶 𝑐𝑜𝑚𝑝𝑙𝑖𝑎𝑛𝑡, 𝑖𝑓 𝑡ℎ𝑒𝑖𝑟 𝑡𝑎𝑟𝑔𝑒𝑡 ≥ 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑖𝑒𝑑 𝑒𝑚𝑖𝑠𝑠𝑖𝑜𝑛𝑠 𝑓𝑜𝑟 𝑡ℎ𝑒 𝑝𝑒𝑟𝑖𝑜𝑑 + 𝑎𝑑𝑗𝑢𝑠𝑡𝑒𝑑 𝐼𝑇𝑀𝑂𝑠 12
We will assume this to be a budget over a given time period. If it is not, and turns out to only a target for a certain number of emissions in a given year, then we consider it a fixed level goal (see discussion in section “2.1 What does it mean to contribute“ 37 •
•
3.3.3
For baseline scenario deviation NDCs, the difference is more significant. As previously discussed, if the baseline scenario is set ex ante, not updated or changed and is meant as the total number of emissions over a period of time in the scenario, it is not significantly different from a budget case above. If however the baseline scenario is changed or updated, then a substantially strict reference level derived from the inventory (such as average emissions in recent years) would constrain the possibility of selling outcomes that are ex post deemed “not real”. In turn this would facilitate trading which could likely then proceed on a seller liability basis, enhancing the fungibility of outcomes. For GHG intensity-­‐based NDCs, similarly, such an approach, If sufficiently strict, could result in a seller liability system and additional fungibility. Managing international transfers Despite the benefits of countries converging on a single contribution type over time as the best way to ensure comparability and compatibility, there is good reason to presume that given the diversity of economic, social, political, institutional and technological contexts underpinning parties’ choices of contribution differentiated contributions may persist for a number of years. Hence, any system to support trading of outcomes in line with Article 6 will likely need to consider the possibility that other management tools may be required to manage flows of outcomes. Even under Kyoto, a treaty that was almost predicated on the assumption of an internationally uniform system of tradeable units, Parties were allowed to introduce trading restrictions to ensure environmental integrity of their commitments. Indeed, despite the substantial new elements in the Doha amendments, Parties made their additional self-­‐imposed restrictions on use of certain units clear. It is therefore important to understand the potential for a number of management tools that could either be used centrally within the framework of a new accounting system or by a Party or a group of Parties (a “carbon club”, so to speak), in order to achieve higher levels of environmental integrity, and a progressive increase in ambition. Such tools could include a number of measures including the discounting of emission outcomes, liability regimes, restrictions on trading particular kinds of outcomes, gateways between different contribution types, reserves, or a combination thereof. These are discussed below. -­‐ discounting of emission outcomes. Proposed several times as a way of addressing either environmental integrity within the context of CDM or the development of either a “net mitigation” or an “own contribution” in the context of a new market mechanism, discounting could either be conceived of as a multilateral response, a bilateral arrangement or a unilateral undertaking by a seller or buyer Party. -­‐ liability regimes. For units that carry risk associated with double counting but also for other purposes related to environmental integrity (such as an adjustment to a BAU baseline), Parties could choose to change the liability regime under which these units would trade. Under Kyoto, every unit issued was tradeable under a seller liability regime, such that a buyer would not have to make any adjustment should there be an issue with the validity of the unit. Buyer liability was considered when discussing in 38 particular issues in relation to environmental integrity of JI and CDM units. In the end, seller liability was chosen over buyer liability, as seller liability would ensure that units carried the same price and would provide broader liquidity in the international market. Buyer liability may however be more appropriate in a context in which units are sold internationally from a variety of mechanisms and sources (i.e. NDCs) which carry different risks in relation to the generation of “hot air” or “policy additionality”. -­‐ restrictions on trading of particular outcomes. Parties will likely want to restrict trade or use of particular outcomes, especially in relation to lack of credible information supporting the generation of the outcome (for example, in such instances in which a baseline contribution does not factor in the most likely economic growth scenarios). -­‐ gateways between different contribution types. A variation of the former approach, gateways allow the use of units from a particular type of contribution towards other types, depending on the net transfer positions between countries. A gateway system was used for example in the early UK ETS, so as to allow the trade by companies with relative targets of units coming from companies subject to absolute allocations. However, in order to ensure the quality of the absolute targets, a gateway structure prevented this last group from being a net buyer at any point in time. Similar restrictions could be imposed bilaterally on trades between different types of contributions, if concerns would be raised by countries related to a watering down in particular of more ambitious targets. -­‐ reserves. Under Kyoto, a Commitment Period reserve was established to prevent Parties at any one stage from lowering their holdings of units to a level that would imply danger to their own compliance with assumed targets. This CPR aimed to prevent “rogue trading” under which a country might decide to sell its Assigned Amount and leave the Kyoto Protocol (or at least not expect any particular painful infringement penalty) but also ensure that trading was restricted in volume over the period. Whereas under most contribution types, a budget approach has been replaced by an inventory approach, it would still be feasible to translate a measure of the proposed trajectory (for multi-­‐year targets) into a reserve, limiting effectively the amount left for trading. What seems clear at this stage is that the simplified registry infrastructure that in essence operationalized the trading and accounting rules of the Kyoto Protocol will be more complex and will likely encompass a rather more diverse type of management tools. 39 4 Conclusions The international climate regime under the Paris Agreement represents a major shift from that of the Kyoto Protocol notably in that all countries contribute, but will do so in different ways. These different contributions range from “Kyoto” style base year budget reductions, to deviations from a business as usual, intensity or per capita goals, to fixed year targets, trajectory goals, or non GHG targets such as policies and outcomes. Although in isolation, regardless of the kind of target, it is not difficult to track if an individual country is making progress towards its NDC (reducing a certain number of tonnes reduced over a period or building a certain amount of renewable energy capacity), many contributions are difficult or impossible to translate into a common metric of absolute tonnes of GHG which makes their impact towards the global effort to well below 2˚C unclear. Adding to this complexity, the Paris Agreement reflects the historical precedent of the Kyoto Protocol and continuing interest of many parties in carbon markets to include a number of flexibility provisions under Article 6. The lack of a common metric in the INDC’s makes accounting for such flexibility particularly complex not only in terms of calculating the world’s collective efforts but also in terms of whether or not some efforts are being counted twice towards that effort. In the short term, the danger that a lack of accounting for trading may pose for the environmental integrity of Parties’ contribution is likely to be limited. Three of the world’s largest emitters, the US, the EU and Russia, which represent about a third of global emissions, have made it clear that they will not use flexibility provisions to fulfil their NDCs. Countries representing another third of global emissions, including a number of countries that opposed market provisions in the agreement, do not mention markets in their NDCs. The vast majority of other countries that have said they intend to use markets or may use markets are likely to want to sell rather than buy any international units. Cumulatively, prominent likely buyers including Canada, Japan, New Zealand, Norway and Switzerland account for less than 5% of global emissions. To the extent that Norway decides to participate in the EU ETS and the EU Effort Sharing Decision for non-­‐ETS sectors, it will adhere to the EU’s refraining from use of international markets. Although the Paris Agreement does not address supplementarity requirements, if these countries achieve most of their mitigation efforts at home, there will be very little demand for any globally traded units. If developing countries intend to increase ambition in the future, they may become increasingly reticent to sell their cheapest mitigation options, reducing supply. The lack of currently foreseeable demand and a possible future reluctance to sell, however does not mean that robust accounting is not important. The Paris Agreement does not have an end date and as diverse as the target years of many NDCs are, there may be new interest in buying credits in future iterations of NDCs, including from large sources of demand. Without robust accounting rules to ensure the avoidance of double counting, the risk to the environmental integrity of the Paris Agreement grows with future possible demand. The appeal of the use of such mechanisms not to use towards a country’s own contribution, but as a metric for results based finance further is also diminished without robust accounting provisions. The inclusion of market mechanisms was a fraught discussion leading up to COP 21 in Paris. While Article 6 of the Paris Agreement, provides a strong “hook” for the future development of market mechanisms 40 under the agreement, the divisions found before Paris will likely continue in the elaboration of accounting methods and applicable rules, modalities, and procedures by the APA supported by the subsidiary bodies. The SBSTA, the APA and ultimately the CMA must consider and resolve the following issues: Keep in mind that the Paris Agreement is built on NDCs It is important to note that NDCs are at the core of the new agreement, and that Article 6, while providing additional approaches for countries to meet their contributions, should not be seen as anything other than a supplemental approach to compliance with contributions. The development of such guidance for cooperative approaches and rules, modalities and procedures for the SDM should not be considered in isolation, but holistically consider how each relates to the other, to what extent they are different and how they relate to the overall framework of the guidance for accounting to be developed by the APA according to paragraph 31. A holistic consideration of Cooperative Approaches, the SDM, and NDCs under Article 6 The SBSTA has specifically been requested to develop guidance for Article 6.2 and to develop rules, modalities and procedures for the SDM. Both of these are to be adopted by the CMA at its first session. Aside from a provision to “provide a clear understanding of climate change action in the light of the objective of the Convention … including clarity and tracking of progress towards achieving Parties’ NDCs” (Article 13.5) and that each party should provide a national inventory and information necessary to track progress (Article 13.7 a and b), Article 13 on transparency makes no direct mention of how to account for any possible transfers under Article 6. Special attention must be paid to single year targets, vintage issues, as well as the potential or limits to adjusting for non-­‐GHG contributions such as policies and actions. Define ITMOs, develop robust provisions for how and where to make “corresponding adjustments” In regulating transfers of mitigation outcomes, one can either attempt regulation at point of generation or at point of use. If one were to choose the first, ITMOs may need to be clearly defined. Must they explicitly be an outcome of a specific activity (project, sectoral measure, etc.), or do they include the creation of budget-­‐like units under an NDC? If the latter, can trading occur on the basis of ex post adjustments to baselines and NDCs? Under what liability/adjustment regime? If there is budget trading, can a reference level (à la Doha for AAU banking) be established to address hot air? However, the more relevant need is for clarity on the process of “corresponding adjustment” for use. The point of what is to be adjusted is not made clear, apart from it being based in some transformation of the inventories and using a common metric – tonnes of CO2e. Given that the 41 inventories themselves should not be subject to tinkering (as to preserve the reporting structure of the UNFCCC) it follows that a process of deriving either a budget or a reference level to which adjustments to account for international transfers must be put in place. Hence, emission totals and adjustments must be recorded elsewhere, in a parallel registry-­‐like accounting system. Account for SDM transfers in host country NDCs While the SDM “can also be used by another Party to fulfil its nationally determined contributions” (presumably when the NDC is expressed in a GHG metric), it is not clear how the SDM should be accounted for in the host country regardless of what kind of NDC it may have. If the SDM is outside of the scope of the NDC in the host country, it may resemble the CDM. As discussed, if it is within the scope of an NDC, depending on the kind of target in the NDC, it may function similarly to JI. 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